Business Cycle Lagging Indicators

The previous blog gave information on the coincident indicators for a business cycle. This blog gives the lagging indicators or the indicators that will change in the future after a change in the Gross Domestic Product, GDP.

These lagging economic indicators include:

• Average Duration of Unemployment
• Labor Costs
• Corporate Profits or Earnings
• Consumer Debt Levels
• Commercial & Industrial Loans
• Business Loans

As GDP increases, Unemployment goes down (more people working), labor costs go up (more people working), earnings go up (higher revenue), debt levels go down (more money available)and the amount of loans should go down (less loans are required).If GDP decreases these indicators should act in a reverse fashion. As you watch the performance of these indicators, do not believe that they predict future performance of GDP.

While this is good economic data, using it as an investor is like driving a car while looking in the rear view mirror. I follow the 4 leading economic indicators more closely for making investment decisions rather than any lagging indicator. Do not confuse a lagging indicator with a leading indicator.

Note that corporate earnings are a lagging indicator instead of a leading indicator. This the one indicator that gives investors the most problem. Why? A good earnings report leads people to believe that good things are going to happen in the future so that an increase in earnings will increase stock price because we have a Price to Earnings number for a stock.

The key learning point is to pay much more attention to future revenue & earnings rather than earnings for a previous quarter. This is why a stock has a great earning report for a quarter and the stock goes down because of a comment about future revenue or profits.

The next blog will review the GDP for the 1st Quarter 2008 and see what it tells us about our current business cycle.

Business Cycle Coincident Indicators

The previous blog gave information on the leading indicators for a business cycle. This blog gives the coincident indicators or the indicators that coincide with performance of Gross Domestic Product, GDP.

These indicators give confirmation of where we are in a business cycle. While these indicators are important from a confirmation perspective they are not as useful to an investor as the leading economic indicators.These coincident economic indicators include:

• Industrial Production
• Personal Income
• Employment
• Average Number of Hours Worked
• Manufacturing and Trade Sales
• Non Agricultural Employment
  

As GDP increases, these indicators should also increase. Conversely, if GDP decreases these indicators should also decrease. As you watch the performance of these indicators, you should see confirmation with GDP.

While this is good economic data. I follow the 4 leading economic indicators more closely for making investment decisions. Do not confuse a coincident indicator with a leading indicator.

Business Cycle Leading Indicators

Previous blogs have given information on the business cycle for our U.S. economy. Gross Domestic Product, GDP, is measured to see where we are in the business cycle.

Wouldn't it be nice to know where we are in the business cycle ahead of time? If we did we could make better investing decisions. We can get a picture by looking at something call leading economic indicators or the things that move ahead of the GDP measurement.

The leading economic indicators include:

• Building Permits
• Stock Market Prices
• Money Supply (M2)
• New orders for consumer goods
• Average Weekly Initial Claims in Unemployment
• Changes in Raw Material Prices
• Changes in Consumer or Business Borrowing
• Average Work Week for Manufacturing
• Changes in Orders for Durable Goods

The things I watch are:

1. Stock Market Prices - going up now after a decline
2. Money Supply (M2) - going up, increasing by about $200 Billion in the 1st Qtr 2008 alone. A few data points to illustrate the trend. (January 2007 = $7.1 Trillion, January 2008 = $7.5 Trillion, March 2008 = $7.7 Trillion)
3. Changes in Raw Material Prices - going up (I think that is more of a global indicator rther than just a U.S. indicator now)
4. Average work week for manufacturing - this should be going up due to value of the dollar relative to other currencies.

To me this indicates that our economy is not in a contraction mode. It appears to be in a trough or early expansion mode.

Bottom Line: Do not let the news get you down.

Current Status of U.S. Business Cycle

The last blog looked at the features of a business cycle. Typically, we think of the U.S. economy business cycle. Let's look at the current environment for commodity prices and interest rates relative to the business cycle of the U.S. economy.

In an expansion, commodity prices are rising because of higher demand and interest rates are rising to contain inflation. In a contraction, commodity prices are falling because of reduced demand and interest rates are falling to stimulate the economy. It would be easy to tell which stage we are in if all of the indicators were going in the same direction. However, this typically does not occur.

Let's look at the cost of gold, the fed funds rate, the 10 year treasury bond rate, and the value of the dollar relative to other currencies and see what they tell us about the current status of the U.S. economy business cycle. Gold has gone from about $1,000 to $900 per ounce. Fed Funds rate has been reducing and the experts predict another 0.25% reduction. The 10 year treasure bond rate has been rising recently from a low of about 3.28% to recently 3.82% while the Fed has been reducing the Fed Funds rate. The dollar is close to an all-time high relative to some other currencies

If you listen to the news, the message is that the U.S. economy is either in or going into a recession. Remember that a recession is 6 months with negative growth in the Gross Domestic Product, GDP. Since the economy is the #1 political topic in the current election. The democratic view is that we are in a recession. The republican view that we are in a slowdown.

Based upon the data, who is right the democratic party or the republican party? The data is telling me that the republican view of a slowdown is correct. Why? I do not believe that we will have 6 months of negative GDP. What is the logic?

• The reduction of the Fed Funds rate indicates a contraction.
• The increase in the 10 year Treasury bond rate indicates that we have gone through a trough and have started an expansion. The bond rate has been increasing while the Fed has been reducing the Fed Funds rate which seems rather unusual on the surface. The Treasury bond rate is a better leading indicator than the Fed Funds rate.
• The decrease in the price of gold suggests that the economy has peaked and is entering a period of contraction. This is a bad indicator for our economy and is a better indicator for the global economy.
• The value of the dollar makes it more attractive for products made in our economy to be sold globally. It helps increase exports and reduce imports. This helps our economy expand in the future.

The Fed Funds rate is telling us that our economy is in a trough. The 10 year Treasury bond rate is telling us that our economy is past the trough and will be expanding. The value of the dollar helps our economy.

Bottom Line: Do not listen to the doom and gloom. The indicators suggests that our economy is at a trough in our business cycle starting to enter an expansion in the future. Do not be afraid of purchasing mutual funds that invest in stocks if it fits your risk tolerance.

Understanding Business Cycle

The measure of the health of our economy is the Gross Domestic Product, GDP. It measures the value of all goods and services produced in the United States including consumption, investments, government spending, and exports minus imports. The GDP is reported by the government on a quarterly basis.

GDP goes through periods of time where it gets bigger and smaller. When GDP gets bigger it means that businesses are expanding and is called business expansion. When GDP gets smaller it means that business is shrinking and is called contraction. The business cycle has 4 stages: expansion, peak, contraction, & trough.

Since data is reported historically, we only know the health of the economy for the previous quarter and not how healthy we are in the current quarter. GDP is not a leading indicator for an investor because it takes the measure of economic health in the past. Do not invest using a GDP report.

In an expansion, business is growing and can be measured by the following being higher: GDP, consumer demand, corporate sales, manufacturing output, wages, savings, real estate prices, and stock market. Along with these going higher, the Federal Reserve, Fed, is raising interest rates and slowing the money supply to fight inflation.

At a peak, these things stop growing and the Fed is holding interest rates and the supply of money.

In a contraction, everything flips and we have lower: GDP, consumer demand, corporate sales, manufacturing output, wages, savings, real estate prices and stock market. The Fed is lowering interest rates and increasing the money supply to stimulate the economy to avoid a recession or depression. A recession is 6 months of contraction while a depression is 18 months of contraction. Another definition is a recession is when your neighbor loses their job and a depression is when you lose your job.

At a bottom things stop falling and the Fed is holding interest rates and the supply of money.

Watching stock prices, interest rates and commodity prices tell us where we are in a business cycle.

The next blog will be on where the United States economy and global ecomony are in the current business cycle.

Irrational Behaving Markets

My favorite investment book is "A Random Walk Down Wall Street" by Burton G. Malkiel. This is a good book for any investor. At the end of Chapter 3, a little paragraph summarizes irrational behavior in the stock market or any other market such as interest rates or commodities.

An underlying assumption that investors make is that the markets are both rational and efficient acting in a predictable manner. While this is true most of the time, it is not true all of the time. "The market evantually corrects any irrationality-albeit in its own slow, inexorable fashion. Anomalies can crop up, markets can get irrationally optimistic and often they attract unwary investors. But eventually, true value is recognized by the market, and this is the main lesson investors must heed."

Yesterday's blog touched on this topic. Because of numerous factors any market can act irrationally for a period of time. People only know that it was irrationally high after a correction or irrationally low after a bounce. It is kind of like driving by looking in the rear view mirror. A savvy, disciplined, or just plain lucky investor can sometimes recognize irrational behavior and make money.

An investor that goes with the flow will buy toward the top and sell toward the bottom. Human nature wants to invest in a proven winner because it makes us feel good. Human nature wants to get rid of something that seems like a failure. This means that we tend to buy late and sell late. The more money we lose the greater amount of pain.

From painful experience, I can tell you some of the signs of irrational behavior:

• It seems that everyone is talking about it. It is on the news. Everyone seems to become obsessed about it.
• A statement is made by someone in the know, whomever that is, that the price is just going to keep on going as if the trend will continue forever. Reasons are given and on the surface it makes sense. After challenging a few assumptions, it becomes obvious that this is just repeating what someone else said without a justification.
• The investment has a track record of going up at a fairly steady rate for a substantial time period such as housing prices have been going up on average at about a 5% rate for the last 40 years.
• The rate changes by a significant amount each year for a while, like a few years.
• The price is much higher than any historical level such as a price of 100 times earnings versus 20 times earnings or $1,000 per ounce versus $300 per ounce.
• A herd mentality exists because somebody has recently made lots of money with this investment and the herd joins because they want to become a winner.
• The price has some fluctuations at the top but always seems to bounce back. The stock price goes up or down by 5 - 10% in a day. If it goes down 5% today, surely it will bounce back this amount tomorrow.
• An event happens, like a comment from an expert or the publication of a report and all of a sudden the thing that was going to keep the price climbing higher didn't.
• The price comes down over time, like a staircase, in a painful fashion.
• If you ever say surely it can't go any lower than this, you know that you are in trouble. This is a statement to justify hanging on to it. If you say this, SELL.

It is relatively easy to not get burned. If you own a stock, place a stop loss sell order at a price that you would be happy to get if something went wrong, so if this something happens you will still be happy. If you own some mutual funds and one gets rather excessive in proportion to the rest then sell some of it to get your portfolio back in balance.

Don't learn this lesson the hard way like I did. Profit from my mistake.

Gold & Oil Market Bubble

Last night I was watching the 700 Club and I heard some predictions: Oil reaches $200 a barrel, & gold reaches $1,500 - 2,000 per ounce. I remember about a decade ago, in the height of the internet/technology bubble, that some of my stocks were going to keep rising into the stratosphere. These comments last night, that we are going to double without a reasonable justification, sure did sound like we are in and approaching the top of a bubble.

Let's go back about 10 years. The belief was that the internet was going to keep growing at a tremendous rate. Companies based business models on this projected growth rate and people bought into it. The price of the stock relative to its earnings, P/E ratio, was at least 5-10 times a normal level. Stock prices of these darlings went up and up for a few years. I think this has been called building a castle in the air without a foundation.

What happened about a decade ago, the projection rates were much higher than reality. When reality hit, business models were not valid, companies could not meet expectations, some companies went bankrupt, and investors lost lots of money. Once it became clear that the future was nothing like what people believed, POP, lots of people wanted to sell. Unfortunately, nobody wanted to buy so the prices went down fast.

Some had a perception that the Federal Reserve System could somehow prevent another bubble. Is this true? No, it is impossible to regulate greed.

In fact, I think we are currently in the aftermath of a market bubble, sub-prime mortgages and the financial sector. Not to long ago the stocks in the financial sector, such as Citigroup, were the darlings and were going to keep rising. Now we all know that the financial sector is in trouble and we are in a middle of a mess.

If another bubble can not be avoided by the Federal Reserve, where is the next bubble? It appears that gold & oil are prime candidates. In fact all of the commodities that have had similar run ups, like copper & gas, appear to be in a bubble.

What do you do now if you believe we are in a bubble? For stocks, place a stop loss order, and keep moving it up, as stock prices increase. For a mutual fund that is particular to a sector, like energy or precious metals, you want to sell some and start diversifying into other areas.

The bottom line is to keep your portfolio in balance. Keep from getting over-weighted in an area that could financiall hurt you.

Mutual Fund Diversification - Say No to Index Funds

Some investment professionals make the recommendation that the best way to invest in a mutual fund, that invests in stocks, is to purchase only low cost index funds. I think this is crazy and you should buy the best funds and make more money for yourself.

An index fund is a mutual fund that owns all of the stock in the exact proportion as an index such as the S&P 500. The S&P 500 stands for the Standard & Poors 500 that is comprised with the stock of the 500 largest U.S. companies.

What is the logic for the statement? The belief is that about half of the stock mutual funds will be below an average and half will be above an average. Since you never know if your mutual fund is going to be below or above having the average is a good idea. Also, investors of mutual funds can have considerable cost to pay for all of the professionals that run the funds, loads, and 12B-1 fees. If the mutual fund is investing exactly like an index fund then the cost to run it and the fees should be and are lower. You get the average and you are in the middle of the pack.

What this means to me is this. Go buy average performance and pay the least amount of fees because this is a lot better than buying a below average performing fund and paying higher fees. A study that is referenced in this blog indicates that the average fund after fees was below an index by about 2% due to the high cost of fees. A better gameplan is to be smarter than the average investment professional, that is taking money from your pocket, and buy the half of the funds with a better track record without a load so that you have minimal cost.

Let me illustrate why this is a better strategy. When the stock markets closed on Thursday April 17, 2008 the S&P 500 was down 7.0% for the year. One would think that the entire stock market was down. Not true, the Dow Transports was up 9.1%. Also, given the rise in commodity prices, companies in the Energy sector or Material sector had stocks that have risen this year. Somebody is making money, it might as well be you.

Which goal do you want? Avoid a negative consequenc like potentially owning a bad mutual fund and settling for an average mutual fund or go 1st class for only a little more and own the better than average mutual funds.

Are you really average? I don't think so, especially if you are reading this blog.

Stocks or Mutual Funds

An investor has an option when it comes to buying equities, individual stocks are a mutual fund that contains a group of stocks. The mutual fund gives diversification in a variety of stocks. An individual stock has no diversification and has considerable more risk because it has unlimited upside potential and can theoretically go to $0.00. For the savvy investor which one is best an individual stock or a Mutual Fund? My answer is a mutual fund.

Reasons to Own a Mutual Fund

While a stock has considerable risk a belief seems to exist that a person can get sufficient information to know when to buy or sell it. I think this is absolutely false. Let's look at the events around General Electric, GE on Friday, April 11th.

Certainly GE has been a darling on Wall Street. On Friday, April 11th, GE announced earnings. Let's go through the sequence of events:

• The belief on Wall Street was that earnings would be good and reasons were given by the experts that make a lot of money giving investor advice.
• Earnings missed expectations and a positive spin was put on the results.
• By the end of the day the stock dropped 13%, the worst 1 day decline since the 1987 market crash. This fact came from Barron's April 14, 2008 publication.
• Barron's wrote a wonderful article in this publication, "At GE, One Bad Quarter Doesn't Spoil the Story" by Andrew Bary

The questions are:

1. What would you have done if you would have listened to the advice prior to the earning announcement? Lost 13%.
2. Why would Barron's publish the article? To sell more publications.
3. Why would Andrew Bary write the article? To make money.
4. Do people at Barron's or Andrew Bary own GE stock? Most likely.

Bottom Line: Are you getting the total unbiased information from these experts? No. If these experts can't get it right on GE, what makes you believe they will get it right on any stock that you own.

The Stock Market and a Recession

It seems that the main economic question in the media is whether or not the United States economy is in a recession. The answers from the experts, including the political pundits, are not conclusive. In fact, different experts give us different definitions for the word “recession”.

The real question for an investor is: How does the stock market perform in a recession? A recession is a normal part of the business cycle and does tend to occur at least once a decade. If recessions occur periodically, then we can study them and learn how to invest when one occurs.

Investors have the option to purchase stock in an individual company or a grouping of stocks in an index. The performance of a stock index invested in the largest 500 U.S. companies, also known as the S&P 500 index, is shown for the last 5 recessions.

S&P 500 Index Performance During The Past 5 Recessions

Overall Recession Period: # of Months//First Half//Second Half//Total
December 1973 - March 1975:16//-17.4%//5.1%//-13.1%
February 1980 - July 1980:6//-6.9%//14.5%//6.6%
August 1981 - November 1982:16//-14.5%//23.7%//5.8%
August 1990 - March 1991:8//-9.5%//16.5%//5.4%
April 2001 - November 2001:8//4.4%//-5.9%//-1.8%
Average Since 1953 - 1954: //-8.6%//13.2%//3.1%
Source: Citigroup Global Markets

Each recession is unique and the length, severity of the downturn, and magnitude of the rebound cannot be predicted. The period from December 1973 – March 1975 had the largest downturn at 17.4%. The latest downturn in the S&P 500 index started in October 2007 and has gone through March 2008 with about a 20% reduction in value, eclipsing the previous mark. If you believe that we are in a recession, the data says that a 20% decline is about as bad as it gets.

Generally, the S&P 500 index does perform better in the second half than the first half of a recession. An investor needs to understand the reasons why this can occur. Insight can be gained by looking at market timing, leading versus lagging indicators, and the relationship of the S&P 500 index with a change in interest rates.

Market Timing

No announcement occurs when the S&P 500 index is at the top or bottom of a cycle. History tells us the date and value when the top occurred and when the bottom occurred. In fact, the low of March 2008 may not be the low of the cycle. We only know the dates for the first half and the second half after the recession is over.

When the S&P 500 peak occurred in October 2007, no warning signs flashed on the TV screen or were printed in the newspaper. If a prophet did say it, would an investor believe it? Human nature tells us probably not.

It is hard to comprehend the idea that stocks should be sold when the news is good. It is equally hard to comprehend the idea that stocks should be bought when the news is bad. What is the bottom line for an investor? You cannot time the market.

Leading versus Lagging Indicators

The official announcement of entering a recession or leaving a recession is a lagging indicator. At some point in the future, an economist will tell us the date when a recession started, when it ended and the halfway point. Do not use a lagging indicator to predict the future.

The S&P 500 index is more of a leading indicator because investors are making buy and sell decisions on a value in the future. This most recent decline in the S&P 500 index is suggesting that our economy is in a recession.

An investor should not use the official announcement that we are in a recession to buy or sell stocks or the S&P 500 index. Why? A lagging indicator cannot predict the performance of a leading indicator.

Relationship with Interest Rates

As the economy slows down, the Federal Reserve lowers interest rates. As the interest rate drops, the return on a bond, CD, bank account, or money market account goes down, making them less attractive to an investor. People are more attracted to these types of investments when the interest rate is high and less attracted when the interest rate is low.

As the interest rate and the S&P 500 index fluctuate, an investor considers the appropriate to move from one investment alternative to another. In a recession when both the interest rate and S&P 500 index price have gone down an investor will consider the right time to purchase stock or a stock index. This occurs when the interest rate is sufficiently low and the price of the S&P 500 index has gone down enough in value that an investor believes the future reward of owning the S&P 500 index is worth the risk of it going down even further.

This suggests that an inverse relationship exists with interest rates and the future direction of the S&P 500 index. Higher interest rates tend to make fixed return assets, like bonds, more attractive and the S&P 500 index less attractive. The reverse happens for lower interest rates.


Summary

A long-term investor should realize that recessions do occur. An announcement that it has occurred is not a good indicator of the future direction of the S&P 500 index.

Is now a good time to buy the S&P 500 index? Yes, relative to October 2007. Since the value of the S&P 500 index is about 20% lower than in October 2007 it means that it has essentially gone on sale. If you were happy to buy it in October 2007, you should be even happier to buy it when it is cheaper. Also the drop in interest rates from October 2007 until now makes the S&P 500 index more attractive.

Human nature tells us that it is more difficult to purchase the S&P 500 index when the news is bad. Invest using data rather than emotion. Do you really want to pass up a 20% off sale?

Reasons We Delay Retirement

Retirement related articles are everywhere even the front page of the Tuesday, April 8, 2008, USA Today.

What are the top reasons why workers do not know when they will retire.

1. 53% - Like to work (Interpretation 47% would like to retire)
2. 35% - Not enough money
3. 26% - Too many expenses
4. 10% - Too busy
5. 10% - Waiting on Spouse

From the data it is obvious that people gave more than 1 reason. It appears that #2 & #3 go hand in hand at 61%. Since more than 1 reason can be given, it appears that of the 47% that would like to retire it really comes down to monetary reasons of not enough income to cover expenses.

What is the remedy to curing this problem of 47% who wants to retire? Start saving for retirement early and let the money work for you. Get some professional help so that your savings will grow faster than inflation.

Do you really want to keep working? Isn't it better to have your money work for you than to keep working?

Using Your Retirement Savings

Congratulations, you are retired and now you are in the fun stage of spending your retirement savings. What is the best approach to doing this?

One option is the 4% rule: Withdraw no more than 4% of your portfolio the first year of retirement and then increase that amount for inflation each year. And indeed, if you do this, there will be roughly a 90% chance that your money will last at least 30 years.

The option that I prefer is to maintain a blend of investments that gives stability and growth. You need to have a balance of equities (stocks) that give longer term growth and short term bonds plus money market accounts that give stability in a diversified approach. You need to do the opposite of your emotion and use some common investing sense that equities go down when you least expect it and go up when you least expect it:

• When equities are down and are on sale and you are told that things are terrible, like the last 6-8 months, instead of selling them, sell short term bonds & money market account.
• When equities are up and are at a premium and you are told that things are great and only getting better sell them and keep your short term bonds and money market account.
  

Other Timing considerations include:

1. If you're retiring when the markets are in turmoil, hold off for a year or two so that youl avoid pulling money from your savings during a falling market. If waiting isn't an option or you've already retired, consider part-time work or a consulting gig. The more you bring home, the less you have to tap savings.
2. Rein in the withdrawal amount, especially from the equities in your retirement accounts. You can't control the market. But you can limit the damage of weak returns by holding the line on withdrawals.
3. Scale back or putting off larger expenditures such as replacing your car or taking a major trip abroad. Any cutbacks you can make will give your savings a chance to recover.

If you have the right balance with your retirement savings, you should relax when normal market fluctuations occur. It is important to tweak and fine tune withdrawals and expenditures. Talk to your investment professional before you make any significant changes in your withdrawal strategy.

Retirement Saving Options For Business Owners

If you are a business owner, you have additional ways to save for retirement. Here are some details on the best self-employed retirement plan options for small business owners based on the 2008 tax rules.

Simplified employee pensions (SEP) are generic retirement plans that allow you to contribute and deduct up to 20% of self-employment income (25% of salary if you're an employee of your own corporation). It literally takes only minutes to get one started, usually with no charge from a brokerage firm. They are just as easy as deductible IRAs, but they allow much bigger contributions.

Solo 401(k) is the next best option to a SEP and you can contribute up to 100% of the first $15,500 of your 2008 compensation or self-employment income ($20,500 if you'll be 50 or older at year-end). On top of that, you can contribute and deduct an additional amount of up to 25% of your compensation income, or 20% of your self-employment income.

Roth IRA can be set up along with a SEP or Solo 401(k) to get an additional retirement tax break. Contributions are nondeductible, but earnings build up tax-free and you can eventually take out all your money without owing Uncle Sam a dime. For 2008, contributions up to $5,000 are allowed ($10,000 for couples), subject to phaseout between adjusted gross income of $101,000 and $116,000 for singles ($159,000 and $169,000 for joint filers). So you can contribute the max to your SEP or Solo 401(k) and then contribute an additional $5,000 into a Roth IRA. You can contribute an additional $1,000 if you will be 50 or older at year end. So can your spouse if he or she passes the age test.

Spousal Deductible IRA is a poor stepchild to other self-employed retirement-plan choices, you should know one thing: If your spouse contributes to a retirement plan at work but you do not, you can contribute $5,000 for 2008 ($6,000 if you will be age 50 or older at year-end) to a spousal deductible IRA, as long as your joint AGI is below $159,000. (The deduction is phased out between AGI of $159,000 and $169,000.) While this is all well and good, contributing to a Roth IRA may save more taxes in the long run.

If your business has employees, a SEP, or Solo 401(k) generally must cover them as well — meaning you'll probably have to make contributions that don't just benefit yourself. All employee SEP contributions are immediately 100% vested.

Happy 70 1/2 Birthday

What is one of the most important retirement birthdays? Age 70 1/2

It seems rather unusual to celebrate a half birthday. Why is this important? It is time to celebrate that you made it and start taking you Required Minimum Distribution (RMD). It means that you must take out some money from your retirement account like a traditional IRA and you have the option to spend it.

Of course you will have to pay taxes on this distribution which is why the government established this RMD requirement. Since the money you put in this account was not initially taxed and was allowed to grow without paying taxes, sooner or later the government would like some tax money from it. Why would the government have this rule? To prevent money from transferring generation to generation without ever being subjected to an income tax.

This is really important because if you do not take this RMD the government will penalize you with a penalty tax of up to 50% of the amount you should have withdrawn. You can either take the RMD, pay income tax, and spend the remainder or not take it and pay a penalty tax.

The first RMD must be taken no later than April 1st of the year you turn 70 1/2. It is very likely that you will be taking another RMD by December 31st of the same year. A RMD is required in each subsequent year.

It is possible to delay paying the RMD? This is usually done by:

1. Investing in a Roth IRA instead of a Traditional IRA
2. Working past age 70 1/2

Make sure you work with your investment professional of the details.

Paradox of Social Security

For years many articles have been written about the potential future solvency of the Social Security Administration. Information can be obtained at www.socialsecurity.gov. In my opinion, this is one of the major issues facing our country and not much is being said in today's political arena. Hello, this is a major issue that faces every person who is currently retired and will be retiring, which is most of us.

The paradox is that the people who rely the most on Social Security benefits will be the most impacted by any action to address any potential future solvency issue. The people who need the benefits the most, people with the lowest income, will be impacted if benefits are reduced.

According to the Employee Benefit Research Institure, the average American retiree gets retirement money in the following mix: 40% from Social Security, 24% from earnings, 19% from pensions and annuities, 15% from assets like IRAs, and 2% from other sources. Retirees in the bottom fifth of income, those with less than &8,261 in 2006, have 88% of their money from Social Security. Retirees in the top fifth of income have 19% of their money from Social Security.

It is very scary if you have 88% of your future retirement money in Social Security and you read an article about future problems with solvency.

Bottom Line: Have a retirement plan that goes beyond Social Security benefits as the primary source of retirement money.

Retirement Worries & Preparedness

From the Society of Actuaries' the 3 biggest retirement concerns are:

1. Healthcare cost
2. Effect of inflation on their nest eggs
3. Not being able to maintain a reasonable standard of living

Do retiree's have a reason to be concerned? Yes!!!!

From the U.S. Census Bureau, the median U.S. household income is $48,451. The median U.S. household income for those 65 and older is $16,770. This is about 35% of the median value which is about half of the guideline of 70%.

This is a big deal when the median retirement age household has only about 1/2 of the needed resources.

Bottom line: Start saving early and invest wisely